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MONEY MARKETS

MONEY MARKETS. MONEY MARKET. As per RBI definitions “ A market for short terms financial assets that are close substitute for money, facilitates the exchange of money in primary and secondary market”.

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MONEY MARKETS

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  1. MONEY MARKETS

  2. MONEY MARKET • As per RBI definitions “ A market for short terms financial assets that are close substitute for money, facilitates the exchange of money in primary and secondary market”. • The money market is a mechanism that deals with the lending and borrowing of short term funds (less than one year). • A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. • It doesn’t actually deal in cash or money but deals with substitute of cash like trade bills, promissory notes & government papers which can converted into cash without any loss at low transaction cost. • It includes all individual, institution and intermediaries.

  3. The Definition • Money Market is "the centre for dealings, mainly short-term character, in money assets. • It meets the short-term requirements of borrower and provides liquidity or cash to the lenders. • It is the place where short-term surplus investible funds at the disposal of financial and other institutions and individuals are bid by borrowers, again comprising Institutions, individuals and also the Government itself" • Money market refers to the market for short term assets that are close substitutes of money, usually with maturities of less than a year. • A well functioning money market provides a relatively safe and steady income-yielding avenue. • Allows the investor institutions to optimize the yield on temporary surplus funds. • Instrument of Liquidity adjustment by Central Bank.

  4. FORM OF FINANCIAL MARKETS TIME PERIOD

  5. OVERVIEW OF FINANCIAL MARKETS

  6. Features of Money Market • Transaction have to be conducted without the help of brokers. • It is not a single homogeneous market, it comprises of several submarket like call money market, acceptance & bill market. • The component of Money Market are the commercial banks, acceptance houses & NBFC (Non-banking financial companies). • In Money Market transaction can not take place formal like stock exchange, only through oral communication, relevant document and written communication transaction can be done.

  7. Objective of Money Market • To provide a reasonable access to users of short-term funds to meet their requirement quickly, adequately at reasonable cost. • To provide a parking place to employ short term surplus funds.

  8. importance of Money Market • Development of trade & industry. • Development of capital market. • Smooth functioning of commercial banks. • Effective central bank control. • Formulation of suitable monetary policy. • Non inflationary source of finance to government.

  9. the Players • Reserve Bank of India • SBI DFHI Ltd (Amalgamation of Discount & Finance House in India and SBI Gilts in 2004) • Commercial Banks, Co-operative Banks and Primary Dealers are allowed to borrow and lend. • Specified All-India Financial Institutions, Mutual Funds, and certain specified entities are allowed to access to Call/Notice money market only as lenders • Individuals, firms, companies, corporate bodies, trusts and institutions can purchase the treasury bills, CPs and CDs.

  10. Composition of Money Market Money Market consists of a number of sub-markets which collectively constitute the money market. They are, • Call Money Market • Commercial bills market or discount market • Acceptance market • Treasury bill market

  11. The Products & Process • Certificate of Deposit (CD) • Commercial Paper (CP) • Inter Bank Participation Certificates • Inter Bank term Money (Repo rates) • Treasury Bills • Call Money

  12. Instrument of Money Market A variety of instrument are available in a developed money market. In India till 1986, only a few instrument were available. They were • Treasury bills • Money at call and short notice in the call loan market. • Commercial bills, promissory notes in the bill market.

  13. NEW INSTRUMENTS • Now, in addition to the above the following new instrument are available: • Commercial papers. • Certificate of deposit. • Inter-bank participation certificates. • Repo instrument • Banker's Acceptance • Repurchase agreement • Money Market mutual fund

  14. Certificate of Deposit • CDs are short-term borrowings in the form of Usance Promissory Notes having a maturity of not less than 15 days up to a maximum of one year. • CD is subject to payment of Stamp Duty under Indian Stamp Act, 1899 (Central Act) • They are like bank term deposits accounts. Unlike traditional time deposits these are freely negotiable instruments and are often referred to as Negotiable Certificate of Deposits • A CD is a time deposit with a bank. • Like most time deposit, funds can not withdrawn before maturity without paying a penalty. • CD’s have specific maturity date, interest rate and it can be issued in any denomination. • The main advantage of CD is their safety. • Anyone can earn more than a saving account interest.

  15. Features of CD • CDs can be issued by all scheduled commercial banks except RRBs • Minimum period 15 days • Maximum period 1 year • Minimum Amount Rs 1 lac and in multiples of Rs. 1 lac • CDs are transferable by endorsement • CRR & SLR are to be maintained • CDs are to be stamped

  16. Commercial Paper • Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note. CP is a short term unsecured loan issued by a corporation typically financing day to day operation. • CP is very safe investment because the financial situation of a company can easily be predicted over a few months. • Only company with high credit rating issues CP’s. • Who can issue Commercial Paper (CP) Highly rated corporate borrowers, primary dealers (PDs) and satellite dealers (SDs) and all-India financial institutions (FIs)

  17. Eligibility for issue of CP • The tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crore; • The working capital (fund-based) limit of the company from the banking system is not less than Rs.4 crore and the borrowable account of the company is classified as a Standard Asset by the financing bank/s.

  18. Rating Requirement • All eligible participants should obtain the credit rating for issuance of Commercial Paper • Credit Rating Information Services of India Ltd. (CRISIL) • Investment Information and Credit Rating Agency of India Ltd. (ICRA) • Credit Analysis and Research Ltd. (CARE) • Duff & Phelps Credit Rating India Pvt. Ltd. (DCR India) • The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other agencies

  19. Maturity • CP can be issued for maturities between a minimum of 15 days and a maximum upto one year from the date of issue. • If the maturity date is a holiday, the company would be liable to make payment on the immediate preceding working day. CP is issued to and held by individuals, banking companies, other corporate bodies registered or incorporated in India and unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs). To whom issued

  20. Repo Rates and Reverse Repo Rates • RBI uses Repo and Reverse repo as instruments for liquidity adjustment in the system • It helps banks to invest surplus cash • It helps investor achieve money market returns with sovereign risk. • It helps borrower to raise funds at better rates • An SLR surplus and CRR deficit bank can use the Repo deals as a convenient way of adjusting SLR/CRR positions simultaneously.

  21. Meaning of Repo • It is a transaction in which two parties agree to sell and repurchase the same security. Under such an agreement the seller sells specified securities with an agreement to repurchase the same at a mutually decided future date and a price • The Repo/Reverse Repo transaction can only be done at Mumbai between parties approved by RBI and in securities as approved by RBI (Treasury Bills, Central/State Govt securities).

  22. Repurchase agreement (Repos) • Repo is a form of overnight borrowing and is used by those who deal in government securities. • They are usually very short term repurchases agreement, from overnight to 30 days of more. • The short term maturity and government backing usually mean that Repos provide lenders with extreamly low risk. • Repos are safe collateral for loans.

  23. Call Money Market The call money market is an integral part of the Indian Money Market, where the day-to-day surplus funds (mostly of banks) are traded. The loans are of short-term duration varying from 1 to 14 days. The money that is lent for one day in this market is known as "Call Money", and if it exceeds one day (but less than 15 days) it is referred to as "Notice Money".

  24. Call Money Market Banks borrow in this market for the following purpose • To fill the gaps or temporary mismatches in funds • To meet the CRR & SLR mandatory requirements as stipulated by the Central bank • To meet sudden demand for funds arising out of large outflows.

  25. Banker's Acceptance • A banker’s acceptance (BA) is a short-term credit investment created by a non-financial firm. • BA’s are guaranteed by a bank to make payment. • Acceptances are traded at discounts from face value in the secondary market. • BA acts as a negotiable time draft for financing imports, exports or other transactions in goods. • This is especially useful when the credit worthiness of a foreign trade partner is unknown

  26. Treasury Bills Treasury bills, commonly referred to as T-Bills are issued by Government of India against their short term borrowing requirements with maturities ranging between 14 to 364 days. • (T-bills) are the most marketable money market security. • They are issued with three-month, six-month and one-year maturities. • T-bills are purchased for a price that is less than their par(face) value; when they mature, the government pays the holder the full par value. • T-Bills are so popular among money market instruments because of affordability to the individual investors.

  27. Who can invest in T-Bill • Banks, Primary Dealers, State Governments, Provident Funds, Financial Institutions, Insurance Companies, NBFCs, FIIs (as per prescribed norms), NRIs & OCBs can invest in T-Bills. • All these are issued at a discount-to-face value. For example a Treasury bill of Rs. 100.00 face value issued for Rs. 91.50 gets redeemed at the end of it's tenure at Rs. 100.00.

  28. Gilt edged securities • The term government securities encompass all Bonds & T-bills issued by the Central Government, and state governments. These securities are normally referred to, as "gilt-edged" as repayments of principal as well as interest are totally secured by sovereign guarantee.

  29. Structure of Indian Money Market • ORGANISED STRUCTURE 1. Reserve bank of India. 2. DFHI (discount and finance house of India).3. Commercial banksi. Public sector banks SBI with 7 subsidiaries Cooperative banks 20 nationalized banks ii. Private banks Indian Banks Foreign banks4. Development bank IDBI, IFCI, ICICI, NABARD, LIC, GIC, UTI etc.

  30. Structure of Indian Money Market UNORGANISED SECTOR 1. Indigenous banks 2 Money lenders 3. Chits 4. Nidhis III. CO-OPERATIVE SECTOR 1. State cooperativei. central cooperative banks Primary Agri credit societies Primary urban banks 2. State Land development banks central land development banks Primary land development banks

  31. ! Disadvantage of Money Market • Purchasing power of your money goes down, in case of up in inflation. • Dichotomized and loosely integrated • Irrational structure of interest rates • Highly volatile market • Seasonal stringency of loan able funds • Lack of funds in the money market • Inadequate banking facilities

  32. Characteristic features of a developed money Market • Highly organized banking system • Presence of central bank • Availability of proper credit instrument • Existence of sub-market • Ample resources • Existence of secondary market • Demand and supply of fund

  33. Recent development in Money Market • Integration of unorganized sector with the organized sector • Widening of call Money market • Introduction of innovative instrument • Offering of Market rates of interest • Promotion of bill culture • Entry of Money market mutual funds • Setting up of credit rating agencies • Adoption of suitable monetary policy • Establishment of DFHI • Setting up of security trading corporation of India ltd. (STCI)

  34. The Need • Need for short term funds by Banks. • Outlet for deploying funds on short term basis • Need to keep the SLR as prescribed • Need to keep the CRR as prescribed • Optimize the yield on temporary surplus funds • Regulate the liquidity and interest rates in the conduct of monetary policy to achieve the broad objective of price stability, efficient allocation of credit and a stable foreign exchange market

  35. THE END

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